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The Game of Life – Buying a Home

Buying a home is a major commitment and may be the most expensive purchase of your life.

The decisions you make during the home buying process can make a huge impact on the future of your finances. It’s all too easy to overspend on a home that you can’t afford, which makes it difficult to build wealth in the long run. However, purchasing the right home without overextending yourself can be a blessing to you and your family for years to come.

Preparing to buy a home actually starts way before the time when you purchase the home. It begins by saving three to six months’ worth of expenses in an emergency fund. If you don’t have savings to fall back on, an unexpected repair can cause financial disaster.

In addition to saving for an emergency fund, you’ll need to save for a down payment and closing costs.  If you put at least 20% of the purchase price down on a conventional loan, you won’t need to pay for private mortgage insurance. That’s an extra cost added to your monthly mortgage payment, and it doesn’t go toward paying off your balance. Closing costs can run between 3% to 6% of the home’s purchase price. These costs include items such as an appraisal, inspection, title search, and other fees charged by the title company and lender.

The next step is to meet with a lender to find out if you qualify for a loan and to get preapproved. This part takes a little work on your end to provide financial records to the lender for preliminary underwriting. The lender will want to know that you have a steady income and employment. They may also look at your debt-to-income ratio (monthly debt payments divided by gross monthly income). Also, your credit score typically needs to be at least 620 to qualify and 720 to get the best rates available.

There are plenty of online calculators that you can use to determine how much you can afford to spend on a home, but I urge you to leave plenty of room in your budget for other goals like saving for retirement, your kid’s college fund, or even family vacations. And don’t forget that owning a home comes with extra expenses such as insurance and property taxes. You’ll need to leave room in your budget for those extra expenses as well.

Once you have determined what you can afford, the fun part begins! I recommend that you work with a real estate agent to find a home within your budget that meets your criteria. A professional will guide you through the steps to ensure nothing falls through the cracks. We are also here to help, so please reach out to your advisor if you have questions.

 

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